The crunch to hit outsourcing

We have recently heard from a number of respected analysts that after the financial crisis banks are likely to reconsider their off shoring/outsourcing contracts with the assumption that a number of services will be brought back in-house. Presumably this is so they can exert more control over their processes and be in a position to make any changes to reduce costs i.e. redundancies.

The main reason banks originally outsourced was to reduce their costs and take advantage of the low labour rates, mainly in the East. So as banks plan to cut costs it looks illogical that a cost saving operation would be cut.

Banks will trawl across their businesses land operations looking high and low to save costs wherever possible and the outsourcing contracts will be included in any review. It is in this mood of frugality that banks will have no choice but to measure the cost of outsourcing against the cost of bringing services back in-house. The odds are high that some outsourcing contracts will be curtailed and future plans to outsource rethought.

I think the probability is that outsourcing rates will be re-examined as they may look far more expensive now than before.

There are clearly going to be wholesale reviews of businesses and operations undertaken by all banks and all types of third party contracts must be under real threat. The banks that have created offshore centres will all be looking closely at the costs of maintaining any non core business activities as their focus turns towards key businesses and operational functions.

Banks can be fickle partners and can often be found chasing the markets both on the way up and down. Banks are not known for sustaining long term strategic planning as they tend to zigzag along a development path, which is often in parallel to changes in management structure.

So what actions can we anticipate the banks taking?

I think they will revert to type and retrench into their bunkers, while the markets stabilise and the dust begins to settle on the crisis. They will cut middle and low ranking staff where possible and try and renegotiate long term contracts and run down those contracts nearing their end. Non core businesses and operational functions will be sold or closed, wherever they can. We can expect to see an ongoing process of mergers and acquisitions, where cross savings can be made.

On the upside, we will see all the banks undertaking in-house reviews of all their processes, procedures and systems which could be good news for consultants and software vendors.

One hopes we will also see the rebuilding of the banks management structures and the employment of better and stronger individuals able to understand broader industry processes and the risks inherent in the markets. It is the combination of people and systems that will be the basis of the rebuild. In this environment outsourcing or off shoring contracts look contradictory.